Exercise 13-13 Outsourcing decision affected by opportunity costs LO 13-3 Freema

Question

Exercise 13-13 Outsourcing decision affected by opportunity costs LO 13-3 Freeman Electronics currently produces the shipping containers it uses to deliver the electronics products it sells. The monthly cost of producing 9,000 containers follows Unit-Jevel materials Unit-level labor Unit-Jevel overhead Product-level costs" Allocated facility-level costs 27,500 6,700 6,900 3,800 8,700 One third of these costs can be avoided by purchasing the containers Bad Container Company has offered to sell comparable containers to Freeman for $2.50 each Required a-1. Calculate the total relevant cost a 2. Should Freempn continue to make the containers? Yes No b-1.Freeman could lease the space it currently uses in the manufachuring process. If leasing would produce $10,900 per month, Calculate the total avoldable costs

Explanation / Answer

a-1

Total avoidable cost = Unit-level materials + Unit-level labour + Unit-level overhead + Avoidable Product-level costs

= 6,700 + 6,900 + 3,800 + 8,700*(1/3)

= 20,300.

a-2

Cost when purchased = 2.5 * 9,000 = 22,500

As cost of production is less than the Cost of purchase, Freeman should continue to make the containers

YES.

b-1

Total avoidable cost = Unit-level materials + Unit-level labour + Unit-level overhead + Avoidable Product-level costs + lease payments

= 6,700 + 6,900 + 3,800 + 8,700*(1/3) + 10,900

= 31,200.

b-2

Cost when purchased = 2.5 * 9,000 = 22,500

As cost of production is more than the cost of purchase, Freeman should not continue to make the containers

NO.

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